Summary
The Second Circuit held that the holder of convertible preferred stock was not required to convert the stock before demanding registration of the common stock issuable upon conversion. The court also held that the issuer's insistence on an additional contractual condition constituted anticipatory repudiation, and remanded for calculation and award of prejudgment interest on the issuer's counterclaim.
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Practice areas
Questions Presented
- Whether REA had to tender its preferred stock for conversion before it could demand that Interway use its best efforts to register the common stock to be received upon conversion.
- Whether REA modified the contract under New York General Obligations Law § 5-1103 by agreeing to seek its pledgee's consent to registration and conversion.
- Whether Interway was entitled to prejudgment interest on its counterclaim award and, if so, from what date.
Holdings
- REA was not required to tender the preferred stock for conversion before demanding that Interway use its best efforts to register the common stock to be received upon conversion.
- Interway's insistence that REA satisfy conditions not contained in the contract before Interway would seek registration constituted anticipatory repudiation under New York law.
- REA did not modify or relinquish its contractual rights by stating that it would seek its pledgee's consent to registration and conversion while maintaining that such consent was not contractually required.
- Interway was entitled to prejudgment interest as a matter of right under New York C.P.L.R. § 5001, requiring remand for computation and award of the interest.
Key quotations
“Under the facts of this case, we hold that he need not and reverse the contrary holding of the District Court.” (¶ 1)
“REA had the contractual right to demand that registration efforts proceed so that, thereafter, it could make appropriate arrangements with its pledgee for conversion.” (¶ 11)
“Under New York law, insistence upon terms which are not contained in a contract constitutes an anticipatory repudiation thereof.” (¶ 12)
Factual background
REA transferred interests in Realco to Interway in exchange for Interway preferred stock that was convertible into common stock. The parties' agreement required Interway, upon REA's written request, to use its best efforts to register the number of common shares to be received upon conversion. When REA later requested registration, Interway insisted that REA first tender the preferred stock for conversion and obtain the consent of its pledgees, even though the preferred stock was pledged and the resulting common stock would be unregistered. The court concluded that these prerequisites were not contained in the contract and that Interway's insistence on them constituted anticipatory repudiation.
Procedural history
REA sued Interway and Integrated Container Service over Interway's refusal to pursue registration of common stock unless REA first tendered preferred stock for conversion and obtained the pledgee's consent. The district court dismissed REA's complaint and awarded Interway $127,472 on a counterclaim for breach of warranties concerning REA's financial position, but denied prejudgment interest. REA appealed the dismissal, and Interway cross-appealed the denial of interest.
Remand instructions
On REA's appeal, reverse the judgment dismissing REA's complaint and remand for further proceedings consistent with the opinion. On Interway's appeal, reverse the denial of prejudgment interest and remand for computation and award of interest. Costs of the appeal to REA.